Beijing is coming for the United States electric vehicle industry.
In 2001, China identified electric vehicles as strategically important. EV technology was designated as a priority. Today, the EV industry is a centerpiece of China’s economic plan for the near future. China faces major pollution challenges and is dependent on imports of oil. The EV industry enables China to reduce both pollution and also imports of oil. And because of the implosion of the Chinese real estate market and the reticence of Chinese consumers to spend, China has decided to use exports to generate jobs and growth.
Chinese EVs are coming to the world, including the U.S. The Chinese EV game plan is straightforward. It will be the low-cost producer. It will subsidize production. Losses are acceptable. Economic growth and strategic objectives are more important than profits. China has a very high domestic savings rate. Its cost of capital is low. Marin Gjaja, chief operating officer of Ford’s EV unit, recognizes that Chinese EVs pose a “colossal strategic threat.” Gjaja believes that Chinese EVs could destroy profitability for Ford’s EV unit. Ford’s EV unit is already hemorrhaging money. The business generated losses of $4.7 billion last year.
Gjaja is right. Without action by the U.S. government, China’s EV sector will destroy the American EV industry and further undermine the long-term viability of the U.S. vehicle industry. Ford recognizes that China has better EV technology. But the cost of capital is also lower in China, in part because large federal deficits raise the cost of capital in the U.S.. Labor is cheaper in China. The average auto worker wage in China is about $4.00 an hour. In plain words, China produces better, lower-cost EVs than Ford. It is no different for the EV operations of General Motors. American EVs are not competitive.
Currently, Chinese EV makers face a tariff of 27.5% on vehicles exported into the U.S.. But China is aware of the United States-Mexico-Canada Agreement. To circumvent the tariffs, China plans to build EV plants in Mexico. The Chinese government will provide economic assistance to Chinese EV manufacturers to build those factories. A Mexican auto worker makes about $10 an hour. In contrast, under the recent labor agreement between Ford and the United Auto Workers, a Ford worker who is a member of the UAW makes over $40 an hour.
Put simply, unless vast government subsidies are forthcoming, Ford’s strategy of building EVs in the U.S. is doomed. Tariffs, unless 100%+ price point tariffs, won’t help. Today, China is manufacturing EVs that cost just over $11,000. Adding a 27.5% tariff to that price means China can export an EV into the U.S. with a total cost of about $15,000. Ford’s cheapest EV costs more than $30,000. GM’s cheapest EVs cost about the same.
The U.S. vehicle industry faces the same challenge that the European car industry is waking up to. China intends to dominate the global EV market, whatever the price. China intends to destroy a foundation of American manufacturing. So what should be done?
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First, the U.S. should respond by deeming the domestic vehicle industry as strategically important. Washington should raise tariffs as high as necessary. It should immediately investigate the subsidies that China provides its EV manufacturers who plan to set up production in Mexico and push allies in Europe to do the same.
The purpose of the U.S.-Mexico-Canada Agreement is not to allow China to circumvent tariffs and the rules of the World Trade Organization, in order to destroy an iconic American industry.
